Since the $10,200 UI exclusion was enacted by the American Rescue Plan Act, the big question has been how to treat the exclusion in community property states. It has been Spidell’s position that the UI benefits are community income that are split equally between the two spouses and each spouse may claim up to the $10,200 exclusion. The IRS has confirmed our position in an FAQ posted on its website (www.irs.gov/newsroom/2020-unemployment-compensation-exclusion-faqs-topic-a-eligibility).
The FAQ is reproduced below:
Q4: I’m married and don’t file a joint return with my spouse. We live in a community property state. Are we eligible for the exclusion? (added April 29, 2021)
A4: Yes. Because you live in a community property state, you report half of your unemployment compensation and half of your spouse’s unemployment compensation on your tax return and your spouse reports the other half of your unemployment compensation and half of his or her unemployment compensation on his or her tax return. You should exclude up to $10,200 on your tax return if your modified AGI is less than $150,000. Your spouse should exclude up to another $10,200 on his or her tax return if your spouse’s modified AGI is less than $150,000. Neither of you should exclude more than the amount of unemployment compensation you report on your Schedule 1, Line 7.